DIVORCE ETC… PODCAST – FULL TRANSCRIPT

DIVORCE AND TAXES PART 2 WITH DONNA STERN, S4, EP. 7

Jessica: How does divorce affect your taxes? Have you even thought about that? What things do you need to do differently? Or what do you have to know in order to make the best decisions? Like it or not, tax season is almost upon us. So that’s exactly what we’re talking about in today’s episode of the Divorce etc… podcast. We’re the exEXPERTS, Jessica and T.H. We help you navigate your divorce and successfully move on with your life. So let’s bring in today’s guest.

T.H.: Hey guys, T.H. here with exEXPERTS. I saw a meme the other day that said, “I’m doing my own taxes. You can find me in jail in September.”

Jessica: That’s sounds about right.

T.H.: So that is why we are doing this episode so you do not land in jail. Because you don’t know what the hell you’re doing with your taxes, right? We weren’t trained as CPAs; we aren’t tax experts, but Donna Stern, who is joining us today as our guest, is one of those. We are going to ask her a bunch of questions that will really help you get your life in order, and your money in order, and your plan in order for filing for your taxes. So welcome to the show, Donna.

Donna: Thank you. Glad to be here.

Jessica: You know, Donna, it’s so funny, because we were just saying before we started, the whole idea of how even if you’re not the one, and I’m going to use the stereotypical husband and wife, even if you’re the wife and you haven’t been the one really dealing with your finances, at the end of the day, presumably your signature has been on those jointly filed tax returns for the number of years that you’ve been filing together and married. And so even if you really don’t know what’s going on, you’re responsible for that. Not to get off course, but can you give us one or two short examples of the types of horror stories that you’ve heard people get stuck in after being divorced, so that we can let our audience know how important this stuff is?

Donna: Yes, a lot of people think they’re not responsible for what their spouse does. But they are. It’s as equal as if you sign the return or not because your name is on there. The government doesn’t care about your side deal with him—“Honey, I’ll take care of it.” They’ll come after both of you. I’m doing this 40 years, and they used to ask for a Power of Attorney, and you could do one form with both names on it. Now everything is separate. So if I file a Power of Attorney for a joint return, I have two forms that they each sign. If they owe tax, the government sends two letters—one to the husband, one to the spouse—to prove that “I don’t care about him. This total is your responsibility, and you deal with him later.”

T.H.: Right, and then you were notified.

Donna: Then you know one way or the other.

T.H.: Right, and then you were notified. I mean, if they’re keeping all these things separate, you can’t say, “I didn’t know.” But also, as I was saying before we started recording, there was a woman I know and she was in a marriage where certainly the tax returns were not her “responsibility”. Now she’s getting a divorce, and she’s telling me, she goes, “I don’t think I’ve signed a return in two years. Now, I’m in deep shit.”

Donna: I always encourage, even if I just deal with one spouse, I always tell the other, “I sent a hard copy, a digital copy. Please review it. Call me anytime with questions. I’m here for you. It’s hard to understand. I sent them back their documents. Please look at everything and do prep work together.” But you can only tell them, and whether they do it or not—“Oh, I don’t understand, “or “Oh, I don’t care.”—you get all kinds of answers. But I do promote education. I’m always here for them for the questions. I don’t want them to ever get afraid. “Oh, I have to ask my husband, and I’m afraid.” No, you should always come to me.

T.H.: So I think that that’s the number one thing is you’re looking for an expert to help you with your taxes, is make sure that it’s not like, “Oh, well, my husband has a relationship with the tax person. And so if I go there, he’s going to tell my spouse or whatever.” So, Donna is the type of person that you want on your side because you don’t want letters coming from the government saying that you owe money. You don’t want to be in the dark about this because they will find you. So if it’s Donna or somebody else, make sure that they are educating you. I don’t understand half of it. By the way, I do our tax prep for myself and for exEXPERTS, and we’re not in jail yet. But it’s a lot. It’s super daunting. I don’t know what’s the basics for you is not the basics for me. And so really having somebody like Donna on your side I think is really critical. So that would be your number one step is finding someone who takes the time to educate you, not just someone to get the job done, because you really do need to understand.

Donna: And there’s no stupid question, because if you don’t understand something, it’s a question, and you have to ask it and not be afraid and take the fear out of it. Because that’s the biggest problem with people, they’re so afraid of it. Also, a lot of accountants are so busy they don’t take phone calls or they don’t answer emails. I’m responsive in 24 hours at least, if not sooner—usually sooner.

Jessica: Yeah.

Donna: It’s very important.

Jessica: Yeah, no, I was just going to say I agree. I think that we’re lucky that the accountant that we do work with is one of those people who has his own company and is super responsive and always willing to get on the phone. Look, T.H. and I always talk about the importance of financial literacy. Everyone listening, what’s happening with your taxes is part of financial literacy. No one is saying that you need to be the one to prepare them. Yes, self-preparation is a thing. No one’s saying that you need to do that. But you need to acknowledge that you have to pay your taxes and that you’re the one signing it. I will admit I don’t necessarily understand all of the different things that are taken out and why. When I’m adding up the different columns, I do rely on my tax preparer for that. So thank you Phil. But I think that you have to still know that these are things that you have to do. Getting back to it, knowing that you’re working with someone who is going to be willing to explain to you the answers to the questions you have, but I feel like, can we even back up from that? Someone’s getting divorced and they’re separated now, how do you file? Do you file separate but married? Do you still file jointly? I mean, if this is the first year that someone is going to be filing taxes and they’re not living together as a married couple, what are the different categories and how should that look?

Donna: Well, there are rules. So the government is pretty straightforward that if you’re single and not married or widowed, you file single. If you are single and have kids, you can file as head of household. But if you’re married, even if you’re not living together, your choices are limited. It’s married filing joint or married filing separate, even though you have kids. Then you have to discuss who’s going to take the kids, and then there’s a special tax form to release the other person. All this needs to be discussed during the divorce process on what you are going to do then.

Jessica: Is there an advantage to filing married jointly versus married separate?

Donna: Well, there’s advantages and disadvantages. Married filing joint is one of the best brackets to be. Married filing separate is the worst. It’s worse than single, worst than head of household—

T.H.: What is best versus worst mean? I want you to be abundantly clear. What are the financial implications?

Donna: Married filing joint is best. But whatever your husband puts on that return on a joint, you’re responsible for. So if you have a sketchy ex-husband or wife, you’d want to do married filing separate because now you’re separated from him. You’re stand on your own. In community property states, though, you’re supposed to pick up half the income of the other spouse, if they have earnings. So it’s very complicated.

Jessica: But when you say, to T.H.’s point, it’s best versus the worst—best because you’re getting more tax breaks, and worse because you’re not getting any? What does that actually mean, best versus worse?

Donna: Best meaning when you say which is the best filing status, it’s based on tax brackets. The brackets go from 0, 10%, 20%, 25%, 32%, 35%, and 39%. The cut offs for those different brackets changes with the filing status.

Jessica: You’re talking about how much actually is taken out of your income in taxes?

Donna: Not taken out. It’s a tax bracket. So the calculation, if your taxable income was 100,000 and you’re in the 20% bracket, your tax is $20,000. That 100,000 20% bracket is different in each status. But single, head of household, married filing joint, and married filing separate, that 100,000 falls in a different place.

Jessica: That’s interesting. I never knew that. Okay, so it’s not uniform.

Donna: Yeah. It’s still in a tax bracket world.

Jessica: Okay. Okay.

Donna: Correct. And so it moves.

Jessica: When someone is having the discussion—they’ve decided with their spouse that we are moving forward and we are going to be getting divorced. Maybe it’s even been filed. To your point, this year, this April 15th, or April 18th, whatever they’ve changed it to, is going to come and go, and likely, you will still be married at that point. This is a conversation you’re saying to have within the negotiations of your divorce settlement, like, “We are going to continue to file jointly,” “We are going to file separately.”

Donna: You need to because one spouse can’t file differently than the other. Married filing separate, you have to put the spouse’s name and social security number. I can’t file a single, and he can’t do married filing separate.

Jessica: Are they still signing the other person’s?

Donna: Well, you’re not signing a tax return anymore. You’re signing an e-file authorization form. So we prepare the return, and we send the client an email authorization. When they get that, they’re supposed to review the return. If everything looks okay, both sign the e-file form and send it back to me. Then I know I can press the button to send the return.

Jessica: What I’m asking is if my husband and I were to file separately, you’re saying I still have to have his name and social security number on my form, and he still has to have my name and social security number on his form—am I reviewing his and signing the e-file form for his? Because I would imagine—

Donna: No, only yours.

Jessica: Okay, okay. Okay.

Donna: Only yours if you do separate. But if you do joint—

Jessica: Understood.

T.H.: Right.

Donna: —then you do it together. One more important point, if you’re legally separated, you could file single or head of household. So if during the year you get legally separated, because that’s another step towards the divorce finalizing, but let’s say you have some disputes about property and so forth, but the court signs off legally separated, you then have more options. But a lot of people don’t do that step. They sit and wait for the final divorce.

T.H.: So everybody, I think we’ve clearly displayed how overwhelming all of this is and confusing. This is exactly why you need to get yourself a really great person who will have patience and time with you, because we’re still swirling around this question. But the other risk, in terms of the different ways of filing or safety measure is, like you said before, if your spouse is unpredictable with money and spending, and you think maybe they’re up to no good. Then it may not be in your best interest in terms of tax bracket, but to safeguard your credit and probably numerous other things, it might be better to file on your own so that you don’t get mixed up in a bunch of ugly, unpredictable things. You might not get the same breaks, but you will have hopefully your financial standing intact.

Donna: Perfect. Correct.

T.H.: Right? Okay. Okay. So let’s move on a little bit. Oh, you have something else, Jess?

Donna: I was just going to say, I mean, maybe it’s part of your question, you mentioned, Donna, the idea of filing head of household. I mean, I actually do remember in my divorce—for my first divorce—the father of my kids, that was actually a negotiating point. Because whoever is filing head of household is getting specific tax breaks based on the fact of the kids. So just if there was something that you wanted to say about that. If for whatever reason you can’t get that, is there something else you might want in return?

Donna: Yeah, it’s so complicated. Head of household is one of the best brackets. But as far as the kids go, if you make too much money, you don’t get the credit for the kids anyway. So there are negotiations that can be done to help the other spouse. Or if it doesn’t help them, they say, “You know what? You take it.” It’s definitely a negotiating area.

T.H.: And just to, again, be abundantly clear, when we say take the kids—I have three children. And so I had my two older daughters, my two older children as my dependents, and my son was my ex-husband’s. I mean, they’re basically write offs. They’re kids, we love them, but they’re a tax benefit right now. So, who wants two that are older, or one that’s younger? And that’s how we negotiated it because my son was the youngest, versus my two daughters, but I got a better tax break for two at a time, even though they were a little older than my one son over the years. To your point, my ex makes so much money it really doesn’t matter for him now.

Donna: Correct.

T.H.: But I just want to be clear, when you’re talking about who takes the kids, that’s what we’re talking about.

Donna: And there are rules to that too. Do you provide more than half their support? How many days do they live at your house? You really can’t just say you take this one, I’ll take this one. You have to hopefully be in those parameters to qualify.

T.H.: So when you’re negotiating your divorce, because I was the primary home, and so it really did just come down to pick a kid, because it was “50%”, right? I guess if it’s less or more on either way 50%, then that certainly plays into it. Otherwise, you assume your kids are with each parent an equal amount of time.

Donna: It depends on the child support you get. If you have a very giving ex-spouse and he’s providing even more than half their living expenses, then he would be entitled to it per the government. But again, you can negotiate and sign this release form and 8332 and say, “Even though I qualify, I release the deductibility of them.”

T.H.: Alright, so Donna, let’s say I’m in my initial separation stages, okay? I’ve legally separated; I’m head of household filing. Should you be talking to my lawyer? I mean, should you be a part of my team? Or do I keep you off to the side?

Donna: No, I believe the best thing for the client is we all work together. Because there’s information he has, and there’s information I have, and whatever will be the best for the client, we need to discuss together. Many attorneys have knowledge of taxes, but they’re not experts in it. They don’t know all the other details regarding their tax return. So, definitely. And again, anytime you’re thinking about divorce, go get your own counsel, accountant, and attorney. I don’t want to represent both of you because that could be a conflict. The best thing is to say, “Okay, you stay with Sam, and I’m going to go with Donna,” so there’s objectivity.

T.H.: Right.

Jessica: I was literally just going to ask that question, though. I love my accountant. And so I feel like I would not want to say it’s okay with me to find someone else. I mean, can two people still work with the same accountant, getting divorced?

Donna: You can, but it’s very exposed. I’d be very exposed to liability if anything went awry. You know what I mean? I can be very objective. Even if I love the woman and dislike the man, I’m the kind of person that can just look at the numbers and work them to the best advantage. But he could always come back and say, “This is not fair,” later on, and then I’m stuck. I’d get a disclaimer or a waiver or something signed if they were adamant about it. And it would depend on how amenable they both are.

T.H.: Right, right.

Donna: If there are any signs of bad juju or whatever, then most likely I wouldn’t do it.

T.H.: So we’re going to take a quick break. Because when we were getting divorced from our exes, we hoped someone would take us by the hand and make sure we didn’t make mistakes with our taxes, our kids, our filing status, our friends, dating, and you name it. So you’re in luck, just like building exEXPERTS for you, we also created a Divorce Rulebook for you. We share what we wish we knew back then so you don’t make the same mistakes we did. If you want your copy, all you have to do is visit www.exexperts.com. It’s right there for you. The link is also in the show notes. You don’t know what you don’t know, but we do.

Jessica: So alright, we’ve gone through understanding whether or not, to some extent, whether you should be filing married jointly, filing separately. We understand a little bit more in terms of the fact that depending on how you file the actual amount, your tax bracket could vary by state. By the way, everyone listening, Donna can help you wherever you live nationwide. But depending on where you live, and if you already have an accountant that you work with, just make sure that you’re checking with them on the right ways to do things in your area. Then also the idea of who’s head of household and being able to potentially split up some of the kids, all hugely important aspects when it comes to dealing with taxes and divorce. What are some of the other things, though, Donna, that everyone needs to know, that they may not be thinking about, that you really need to make sure you’re going to do properly or you’re going to end up leaving money on the table or doing it wrong?

Donna: I have a whole list of things. But some of the things T.H. and I were talking about were living trusts. You may have a living trust with your spouse. You have to make sure you get your own later. If you don’t even have a living trust and you’re divorced and now you’re single, you want to get your own living trust to protect your kids and protect your assets from that spouse ever coming back. If you have IRAs, and 401(k)s from years ago, of course, you put your spouse. I think it’s even automatic your spouse is the beneficiary. You must go in and change all of that to whoever you want. You could make your new living trust the beneficiary, and then the trust explains who will get the funds. That’s not the best tax route to go. That’s another complicated area.

Jessica: But is that really taxes? When I’m filling out my tax returns, I’m not putting on my tax returns the beneficiary. You’re just saying for estate planning—

T.H.: Other things to think about.

Donna: This is all part of the planning, and it has ramifications on taxes later as well, who gets the IRA money or distributions. Because like I said, if it’s your trust, if you name your trust, because your spouse says, “Oh, let’s do living trust,” and all the money goes right into the trust, you lose the rollover opportunities. That trust is going to pay all that tax of let’s say $600,000, whereas if it was rolled over to an individual who was a beneficiary, they have the right to roll it over into their own IRA and take it out 10 years from now. There are tax ramifications to who that beneficiary is. Most likely, people just put a trust or their spouse.

T.H.: So what are red flags when you’re going—okay, so again, let’s go back, pretend I’m legally separated and filing head of household. I’m just going to go to H&R Block, or I’m just going to do one of these online tax prep things. How complicated could this really be? Tell me red flags about that or going to a random CPA. What’s the thought process? What are the qualifications we should be looking for when we’re looking to hire somebody like yourself? Or we want to check in with our own person and be like, “Hey, Phil, are you going to do this? Can you do that?” What are some of the questions we should be asking a qualified tax expert before we start working with somebody on our returns?

Donna: Well, first of all, there’s more to tax returns than the prep. If you just have a W-2 and there’s nothing more to it and there’s no planning involved, you could go to H&R. But if you want to build a relationship—I have a client from when I was 17 years old. He retired even before I did it.

T.H.: Wow.

Jessica: Wow.

Donna: You want to do things before the tax returns are due. Because once you’re in filing season, you can’t make any changes of IRA distributions. If you don’t take your minimum distribution by December, you’re penalized. Well, you can go to H&R Block, but it’s too late because now they have the tax form and says, “Oh, you didn’t do something,” or “You took this out before your age was allowed.” There’s nothing you can do. So if you have a CPA that you build a relationship with, you have a opportunity to ask questions before you make the mistake. I think that’s really important—communication. You want someone who will be there to answer your questions and educate you and not just be a mill. I know people that charge $400 but they do a thousand returns. I do 200 returns so I can devote the time to client needs before, during the year, and during tax season.

T.H.: You’ve said many important things, but the one thing that really came to mind is we were thinking, “Oh, you don’t file till April 15th or 18th, right? I don’t have to deal with this till February.” Except that it’s relevant to last year. Actually, everything up until December mattered. What you’re doing January, February, and March really doesn’t matter for the return you’re filing in April. That’s why this relationship is really important because of things you need to be thinking about during the year. You need to be thinking about X, Y, and Z right now for next year April when you go and you file your tax return. That’s also the other really big thing that I want to put out here is, you file when you file, that’s your deadline, but you have a whole year to screw shit up, or also fix things, or also think of things differently. This having a relationship, especially when you’re going through a separation, you really need a team. This is money; this is the government, you’re not screwing around here. You thought your divorce was bad—you don’t want this to be along those lines for the long term. Tax planning is really all year. It doesn’t have to be all consuming every day, even though I leave it all to the last minute.

Donna: But things changed during the year, and I notify my clients to make sure they take advantage of it. We had the stimulus money, and I said make sure you watch for it. But there are people who like to prepare their own returns, which is fine, but they have nowhere to ask questions. So I developed a subscription based service called Prepaid Tax Advice. So for $50 a month or $250 every six months, you have access to a CPA with 40 years knowledge. At least you can get things answered before it’s too late.

Jessica: I love that.

Donna: “I’m thinking of leaving my job. What does that mean about my 401(k)? What if I take it out?”

T.H.: Right.

Donna: Who do you talk to?

Jessica: No, Donna, that’s so brilliant, honestly.

T.H.: I know!

Jessica: So anyone can live in any of the 50 states, they can just pay either monthly or an annual fee and ask you any questions any time, for anything?

Donna: Correct. It even includes QuickBooks and accounting questions, because a lot of people do their own books, or they’re trying to teach themselves QuickBooks, and they have roadblocks.

T.H.: No clue. I have no clue.

Donna: It’s really difficult. So I want to give them an outlet to speak as well. Similar to LegalShield, where you have legal questions, but they’re not every day. Maybe you have a landlord question, or you have a partner, or maybe you’re thinking about divorce. You could at least get a quick answer before you mess up and know you have to go to an expert or a good attorney. But at least it can get you started.

Jessica: Yeah, no, I love that. I really do love that.

T.H.: Yes, amazing.

Jessica: Because I feel people have these questions all the time and don’t know who to go to. But also, just to get back to what T.H. was just saying, everyone listening, you could have filed your divorce however long ago, and it could have come through on January 2nd 2024. Your taxes, as of 2023, the end of the year December 31st, you are still married. It’s really important, I think, for what both of you guys are saying, that for everyone listening, that’s really the cutoff date. You got to be careful that everything that you’re doing is relevant for that year. It’s not until then this year that you’re potentially actually going to have the opportunity file single.

Donna: I don’t take a vacation the last two weeks of December because there are so many decisions that need to be made, and I have to be available to the clients. I can’t be off in Cancun because it is detrimental things get finished before the end of the year.

T.H.: Yep. Yep.

Donna: You’ve got to be proactive with your life. Things don’t happen by themselves. There are always new requirements. We have a new thing called a beneficial owner filing with the government, that if you don’t do it, it’s a $500 penalty per day with no cap. What this is, is for businesses really, and it’s federal. It’s federally based. If you have an entity registered with the Secretary of State, you must file this beneficial owner form. It’s not annual, but if anything changes on the information you gave them, you have to file again. So it’s very complicated, but this is a brand new thing. I’m putting the word out as much as possible to my clients. But if you don’t have a relationship, how would you know about it?

T.H.: Alright, Jessica, did you write that down? You got to ask Phil about that.

Jessica: Yeah, I literally started making a note about that.

Donna: He hasn’t told you about it yet?

Jessica: Well, there’s much to talk about. I mean, honestly, it’s like—

Donna: There’s so much.

Jessica: Right, right. What were you going to say T.H.?

T.H.: Listen, it’s like going to the gym, right? You don’t want to go. But if you got someone who’s like, “Hey, get off your ass and let’s go to the gym,” you’re going to the gym. So if you’ve got Donna or somebody else holding you accountable throughout the year, it’s not going to be so painful, right? You’ve got like a “Hey, don’t forget,” or “Did you think of?” or “Did you know?” “Newsflash: this will help, hurt, or change things.” Really having an accountability partner in the tax world, I feel like is probably the best gift you could give yourself right now.

Jessica: For real.

T.H.: So, really, for all of your questions, I mean, Donna is going to be offering a ton of education and programming this year for all of you. So take advantage of it.

Jessica: Yeah, we have some good stuff planned. That’s right. That’s right. Well, look, I mean, as we were saying, there’s so much more to say about it. We’re definitely going to, as T.H. said, be collaborating with Donna to be able to offer you guys what you need. The subscription based thing is, I think just so brilliant. But for everyone out there—

Donna: I’m happy to give your members a free month just to try it and get to know me and see how helpful it could be. People think they don’t need it, but they do. I’m happy to offer that to your people.

Jessica: That’s amazing. We’ll figure out how we’re going to do that with a code. By the time this airs, for everyone listening, you’re going to want to check the show notes. We’re going to have that information in there. For everyone listening, we hope you enjoyed this episode of the Divorce etc… podcast with the exEXPERTS today, because this is crucial information that you need to know when you’re getting divorced. Your taxes are not something that you can blow off or avoid. Make sure that you take to heart the information and advice that Donna is offering you. Please take a moment to subscribe, rate, and review our podcast. It helps us to help others like you. And for the code for using Donna’s service, definitely check the show notes. We’ll have that posted. Share this with anyone you know that can benefit from listening. Have a great day.